The Bank of England sends a clear message to banks today to cut staff bonuses and share dividends so that they can bolster their capital cushions while maintaining lending to businesses and households.

While issuing a warning that it is in banks' "collective interest" to hold on to more of their profits ahead of the annual bonus season, the Bank also used its twice yearly analysis of the risks facing the financial system to warn of the potential damage that could be caused by sudden rises in the cost of borrowing.

Deputy Prime Minister Nick Clegg also warned banks that the government would not "stand idly by" if they failed to rein in lavish bonuses. He called for "visible restraint" in the forthcoming bonus round and indicated he was determined the coalition would step in if necessary. In an interview in today's Financial Times, he said: "They don't operate in a social vacuum. It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot free."

Long-term borrowing costs are currently at historic lows, making it easier for companies, countries and individuals to maintain their debt repayments. These are causing investors to "search for yield" in riskier areas such as emerging markets, which could cause some "overheating" and affect UK banks with exposures in those markets, the Bank said.

The report describes UK banks as being more resilient than a year ago after returning to profitability, building up their capital buffers and refinancing their debt. But it highlights potential issues from the eurozone crisis that could hurt UK banks even though they do not have large direct exposures to European sovereign debt. For instance, UK banks have claims worth £288bn in France and Germany – two economies that are directly exposed to problems in the eurozone. "Against this backdrop it is in banks' collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff," the report says.

International banking regulators in Basle are demanding banks hold more capital by 2019, following the 2008 crisis that led to taxpayers bailing out banks around the world. Yesterday, the Basle regulators calculated that 94 international banks had a €577bn (£488bn) capital shortfall against what they would need in nine years. The biggest banks also had smaller capital ratios than smaller ones, the regulators said.

A new round of stress tests on European banks will be conducted next year and the report says these need to provide "greater transparency" about the risks facing banks than those conducted this year.

Banks are being given until 2019 to implement the new capital rules because regulators do not want their stricter requirements to stifle lending to businesses and households. The financial stability report argues that banks could keep increasing lending if they retained more of their profits rather than paying them out in bonuses and dividends. "Prudent distribution of profits to equity holders and staff would allow banks to raise capital internally," the report says.

If the bonuses were paid in shares or other loss-absorbing capital, they could help boost banks' capital, while contingent capital or subordinated debt could also be used, it suggests.

The report says that while borrowing costs have risen since the eurozone crisis, this increase has not yet caused major problems even though they could be "susceptible to a sudden reversal" of the kind that happened in 1994 caused by a rise in US interest rates. The knock-on effect then was felt worldwide, with Germany's borrowing costs rising 1.3 percentage points in six months. Orange County in California was forced to file for bankruptcy. "The contagion could be even more marked this time, given the closer integration of global capital markets," the report said.

Low borrowing costs have helped banks by allowing them to access money cheaply and then invest to receive a better return. They also help companies and households with their loan repayments.

But a sharp rise in interest rates could be painful for companies, the Bank said, as 30% of them made insufficient profits in 2009 to cover their interest payments. The Bank also noted that banks had been helping companies – and themselves – during the crisis by rolling over loans as long as companies were making interest payments. In Britain, up to 70% of loans that were due to mature last year were extended – but banks may not be willing to continue to extend credit if economic conditions deteriorate.

"Contacts have suggested that bank forbearance has played a role, with banks rolling over debt as long as companies are meeting servicing costs. It is unclear if this situation is sustainable," the report said.